On Wednesday, wheat prices took a bit of a breather, down to around $11.10 a bushel, ending a six-day run. As I noted the other day:
Wheat futures had shot through $12 a bushel as of Friday’s close, well over double where they were before the pandemic, and are up again today. Wheat prices had been rising for quite some time before the Ukrainian crisis, but this is yet another turn of the ratchet, and it seems reasonable to think that they will rise further.
I’ll stick with the view contained in the last sentence.
As Trading Economics reminded us:
Amid heavy sanctions and restrictive measures from western economies, exports from the Black Sea have nearly halted. Multinational food companies such as Bunge and ADM have closed facilities in the region, while the world’s biggest container ship operator, Maersk/MSC, suspended service to Russian ports. At the same time, the Ukrainian military suspended all commercial operations from Ukrainian ports. Such supply disruptions came on the heels of an already tight market with wheat stocks in major exporting countries at low levels.
Among the consequences of this, a growing search for food self-sufficiency will provide another example of the fissures that are opening up in globalization.
Food security and self-sufficiency have long been high on the agenda of Chinese policy makers. Russia’s invasion of Ukraine gives Beijing more reasons to focus on the issue. Weaning itself off imported foodstuffs would mean more investment into the biotechnology industry and more widespread use of genetically modified food.
Given lemons, the Chinese will make genetically modified lemonade.
The WSJ:
Over the weekend, Chinese President Xi Jinping reiterated the importance of being self-sufficient in food, according to state news agency Xinhua. “The rice bowls of the Chinese people have to be filled mainly with Chinese grain,” he said.
History weighs. China has had terrible experiences of famine (a number of them due to the policies of the Communist party, something that Xi is unlikely to be stressing), and its unease will be increasing in a world where trading relationships are shifting: The trade war with the U.S. at the end of the last decade highlighted, among other things, China’s vulnerability when it comes to food.
One particular weakness that is emerging on the back of the current Russo-Ukrainian war is likely to be that a shortage of sunflower oil, a major Ukrainian export, will drive up prices for alternatives such as soybean oil. The latter is important as, the Journal’s Jacky Wong explains, “China imports more than 80% of what it consumes. Soy is also critical as feed for pigs, the country’s main source of meat protein.”
A move to greater agricultural self-sufficiency is also in line with China’s shift to a form of fascism: The quest for substantial economic autarky, at least in certain sectors, was a characteristic of mid-century fascism, and, as Wong observes “self-sufficiency is a key economic plank” of Xi’s regime. Food will be no exception. The historically minded will note that Mussolini pursued his “battle for grain” to that end. And that did indeed lead to a substantial increase in production, although, to no small degree, it damaged other agricultural sectors. Central planning can be like that.
Wong:
[B]oosting [China’s] domestic crop output might be easier said than done. Urbanization has driven labor to cities and reduced arable land. The country needs better technology to improve crop yields. That probably entails use of GM foods: China has been revamping its regulations on that in recent months. Scarce water, particularly in the north, is another intractable problem.
Improving agricultural productivity was probably the main rationale for state-owned chemical company ChemChina’s $43 billion acquisition in 2017 of Swiss seed and pesticide company Syngenta, which is in the process of an initial public offering in Shanghai. But the other heavyweight GMO companies are mostly American and European such as Monsanto, Dow, BASF and DuPont. China will hope to groom its own homemade champion, but that would take time and investment.
There have been other acquisitions as well.
And, to borrow Ray Dalio’s unfortunate formulation, the “stern parent” has been busy too.
The National People’s Congress, China’s national legislature, in April adopted a food waste law that bans excessive leftovers. At the end of October, the Chinese Communist Party and the State Council instructed officials on how to reduce food waste.
In fact, China will be able to avoid trouble for quite some time. Its buyers have already been marching in lockstep with Xi.
Wong:
The direct impact on China should be manageable. China imports around 7% to 10% of its wheat and corn, according to Goldman Sachs. Such imports have jumped in recent years, partly because the country has been filling up its strategic reserves. China’s grain reserves are at a historically high level, state media reported in November. They could probably be used to soften the blow.
And how high is historically high?
According to a report from Nikkei Asia published in December, China has managed to stockpile more than half of the globe’s maize and other grains. Its reserves are good for a year and a half.
Other countries may not be so fortunate.
Grains are the staples that keep the world fed, with wheat, corn and rice accounting for more than 40% of all calories consumed. But grain stockpiles are poised for a fifth straight annual decline. A combination of higher shipping costs, energy inflation, extreme weather and labor shortages have made it harder to produce food.
As a result, global food prices are already at record highs, with the benchmark U.N. index increasing more than 40% over the past two years. The surge has had crushing consequences. Food insecurity has doubled in the past two years, and the World Food Programme estimates 45 million people are on the brink of famine.
The current crisis is going to make things worse, likely sending hunger to unprecedented levels as the conflict turns millions of people into refugees and sends food prices even higher…
The world has grown hugely dependent on Ukraine and Russia for their wheat, a crop used in everything from bread to couscous and noodles. The nations account for a quarter of global trade. They are also cheap suppliers, which makes their exports favorites for importers in the Middle East and North Africa, including in Egypt, the world’s biggest wheat buyer.
As I observed in my earlier note, rising prices in those markets will have political consequences.
And there’s something else too: While the specialization that comes with being part of a globalized market comes with enhanced efficiency and productivity, it can also increase vulnerability at difficult times.
Bloomberg:
Many countries have positioned agricultural production toward exporting a few key products, rather than for food sufficiency. So nations like Ghana and Cameroon can be big global players in the cocoa market, but are still hugely dependent on shipments for wheat.
Meanwhile, grain-exporting nations can see what’s happening in Russia and Ukraine and decide that the world won’t have enough wheat or barley, so instead of shipping, they move to keep supplies at home. That can lead to a dangerous domino effect of increasing protectionism that hurts the world’s poorest and the countries most-dependent on imports.
There are some early signs of protectionism brewing. Hungary is banning grain exports, and Serbia’s president said Monday the country will soon curb wheat shipments. Argentina and Turkey made moves last week to increase their control over local products. . . .
In Cameroon, which imports all of its wheat supplies, prices for grain shipments have jumped 70%. On top of that, the surging price of oil is sending freight rates soaring, so transportation costs for wheat have climbed by some 70% as well, according to Jean Marie Kakdeu, president of the Cameroon Coalition for the Promotion of National Production . . .
To repeat myself, if I had to guess, wheat’s breather won’t be for very long.